If you’ve never really shopped for life insurance before, then there’s a lot about it that you may not know. For example, you might assume that if you’re over 50, getting life insurance is off the table. The truth is that while you might pay more for life insurance as a 50-something applicant as opposed to someone younger, you may very well be able to get the coverage you want.
Another thing you might be misinformed about in the context of life insurance is cost. Many people are wired to think that life insurance is a generally expensive product. In reality, it may end up being more affordable than you’d think, depending on the amount of coverage you buy and the type of life insurance you choose.
Meanwhile, recent data from Assurance found that 30% of consumers are misinformed about how life insurance works in the context of taxes. But that’s important information to have.
Don’t assume the IRS will come after your loved ones’ life insurance benefit
Taxes apply to many different forms of income. If you withdraw from a traditional IRA in retirement, for example, you’ll pay taxes on that money. Similarly, if you’re paid dividends from a stock investment, those will generally result in a tax liability, too.
But you may be pleasantly surprised to learn that life insurance benefits are generally not subject to taxes. And that might get you to think differently about putting a policy in place for your loved ones.
Assurance found that 30% of consumers thought life insurance benefits are taxed. And if that was your assumption, it may have stopped you from buying life insurance.
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After all, let’s say you’re leaving your loved ones a $250,000 policy. It’s easy to see why you wouldn’t want the IRS to swoop in and take 25% or 30% of that. But rest assured that life insurance payouts generally go to your beneficiaries in full, and the IRS doesn’t get a piece of that income.
Life insurance may be more affordable than you’d expect
There are different factors that go into determining the cost of life insurance. These include:
- Your age
- The state of your health
- The amount of coverage you buy
- The type of policy you buy
The first two are factors you can’t control (well, you may be able to take steps to better your health to some degree, but if you have asthma, you can’t help that). But the last two factors are factors within your control. And if you’re worried about affording life insurance, one thing you may want to do is look at term life policies instead of whole life.
With term life insurance, you’re only covered for a specific period of time, and your policy does not accumulate a cash value. With whole life insurance, you’re covered for as long as you live, and your policy builds a cash value you can eventually tap.
Term life insurance tends to be far more competitively priced than whole life insurance. So that alone could result in savings.
Also, to keep your costs down, don’t overbuy insurance. A good rule of thumb is replace your income about 10 times over and cover joint debts you have with your loved ones. So if you earn $50,000 a year and owe $150,000 on a mortgage, a $650,000 policy may suffice. You’d spend more on a $1 million policy.
All told, there’s a fair amount of misinformation out there about life insurance, whether it’s in the context of cost, taxes, or eligibility. It pays to read up on how life insurance works, so you can make an informed decision.
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